European Financial Management, Vol. 16, No.

3, 2010, 400421
doi: 10.1111/j.1468-036X.2008.00461.x

A Dynamic Approach to Accounts

Receivable: a Study of Spanish SMEs
Pedro J. Garca-Teruel and Pedro Martnez-Solano
Department of Management and Finance, Faculty of Economics and Business, University of
Murcia, Murcia, Spain
E-mail: pjteruel@um.es; pmsolano@um.es

Abstract

The main objective of this paper is to extend the literature on the granting of
trade credit. The focus is to test whether the accounts receivable decisions follow a
model of partial adjustment. To do that, we use a sample of 2,922 Spanish SMEs.
Using a dynamic panel data model and employing the GMM method of estimation
we control for unobservable heterogeneity and for potential endogeneity problems.
The results reveal that firms have a target level of accounts receivable and take
decisions in order to achieve that level. In addition, we find that sales growth (if
positive), the size of the firms, their capacity to generate internal funds and get
short term financing, and economic growth are important in determining trade
credit granted by firms.
Keywords: accounts receivable, trade credit, SMEs, partial adjustment model,
endogeneity
JEL classification: G31, G32
1. Introduction

Trade credit is provided when there is a delay between the delivery of goods or the
provision of services by a supplier and payment for them. For the seller, it represents an
investment in accounts receivable. That investment represents an important proportion
of a firms asset. Specifically, the average level of accounts receivable over assets for
the Spanish firms considered in this study was 38.63%.
The literature offers various theories explaining the use of trade credit based on
the advantages for suppliers and for customers from the operational, commercial
and financial perspective: reduction in transaction costs (Ferris, 1981; Emery, 1987);
reduction in information asymmetry between buyer and seller (Smith, 1987; Long
et al., 1993); a mechanism of price discrimination (Brennan et al., 1988; Petersen
and Rajan, 1997); and greater access to funds for firms that have difficulty accessing
This research is part of the Project ECO2008-06179/ECON, financed by the Research
Agency of Spanish government. The authors also acknowledge financial support from
Fundacion CajaMurcia. The authors thank anonymous referees who have contributed to
this paper.

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bank financing, as a result of the commercial creditors comparative advantages in

the evaluation and control of the credit risk (Schwartz, 1974; Emery, 1984; Mian
and Smith, 1992). Moreover, it should also be borne in mind that the use of trade
credit can help firms to obtain bank financing, since it transmits information about the
borrowers creditworthiness to the credit institution (Biais and Gollier, 1997). In this
sense, trade credit may be used by less creditworthy and constrained firms to acquire
reputation and alleviate adverse selection (Antov and Atanasova, 2007) and mitigates
moral hazard problems (Burkart and Ellingsen, 2004). Consequently, trade credit is
particularly important for small and medium-sized enterprises (SMEs), whose access to
capital markets is very limited (Petersen and Rajan, 1997) and who have more difficulties
in funding themselves using credit institutions.
Trade credit has an effect on the level of investment in assets and consequently may
have an important impact on the profitability and liquidity of the firm. Granting trade
credit improves sales for the firm, and consequently may result in higher profitability,
but over-investing in accounts receivable can be costly due to the increase of investment
in current assets and because it may signal acceptance of late-paying customers. If the
cash discount and the credit period granted by the firm are not competitive compared
to firms in the same industry, this can have negative effects on the value of the firm.
Emery (1984) established that there is an optimal level of accounts receivable when the
marginal revenue of trade credit lending is equal to the marginal cost, and this condition
produces an optimal credit period. Thus, as pointed out by Pike and Cheng (2001), credit
managers must try to keep accounts receivable at its target level in order to avoid the
erosion of the value of the firm by lost sales or uncollectible sales. In order to do that,
Pike and Cheng (2001) found that firms establish target levels for buyers in order to
monitor their investment in accounts receivable and compare the time that debtors take
to settle their debts with their targets. Other ways to improve settlement are, for instance,
assign credit limits to all customers, review credit terms, give higher cash discounts for
prompt payment, charge interest on overdue payment, incentives for credit staff, etc.
In this paper we assume that firms have a target trade credit policy but that they cannot
immediately adjust to their target levels of accounts receivable. Previous empirical
studies have been based on static models, which implicitly assume that firms can
instantaneously adjust toward to the target level of their accounts receivable. In contrast
with this, the major objective of this paper is to extend empirical research on trade credit
on the assumption that an adjustment process may take place. Thus, we use a partial
adjustment model where we allow for delays in adjusting towards the target level of
accounts receivable, where such delays may be justified by the existence of adjustment
costs.
In order to do that, we have chosen a sample of small and medium sized Spanish firms
for several reasons. SMEs are most likely to suffer severe problems of asymmetric
information owing to their size and background and the lack of formal credit rating
measures for firms. Thus, trade credit is especially important for SMEs because of their
greater difficulty in accessing capital markets (Petersen and Rajan, 1997; Berger and
Udell, 1998). Most previous studies that analyse the determinants of trade credit have
centred on large firms (Long et al., 1993; Deloof and Jegers, 1996, 1999; Hernandez and
Hernando 1999; Cheng and Pike, 2003; Pike et al., 2005, among others), while empirical
evidence for SMEs is scarce and focused on Anglo-Saxon countries (Petersen and Rajan,
1997, and Elliehausen and Wolken, 1993, for the USA; Wilson and Summers, 2002 for
the UK) or focuses on accounts payable (Huyghebaert, 2005; Rodriguez-Rodrguez,
2006; and Huyghebaert et al., 2007): the only exception to this pattern is the study

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Pedro J. Garca-Teruel and Pedro Martnez-Solano

of Niskanen and Niskanen (2006), who studied small Finnish firms, focusing on a
bank-based system.
The financial system of the European Union is classified as a bank-based system,
except for the UK where capital markets are well developed (Schmidt and Tyrell, 1997).
However, as Maroto and Melle (2000) found, the European bank-based financial system
presents important differences between Northern countries (Germany, Scandinavia),
and Mediterranean countries (Greece, Italy, Portugal, Spain). Among them, as Marotta
(2001) point out, the effective payment periods are longer in Mediterranean countries
(France, Italy, Portugal and Spain) compared to Northern countries (Germany, Scandinavia). This may be due to two separate issues: a) initial terms of payment are much
longer in Mediterranean countries as opposed to Northern countries; b) payments are
much more likely to be delayed in Mediterranean countries than in Northern countries.
In this sense, Omiccioli (2004) shows that initial terms of payment in different European
countries represent on average around three quarters of the effective payment periods.
These results are consistent with the European Payment Index Report (2007) 1 which
shows that, although payments are made in general more promptly in Scandinavian
countries, the average terms of payment (average delay of payment) for Finland is 20,40
days (6,3 days) and for Norway 19 days (7,4 days), while for Spain it is 67,40 days
(15,2 days), and for Italy 73 days (23,9 days). Consequently, the longer payment periods
in Mediterranean countries are mainly due to the fact that initial terms of payment are
much longer than in Scandinavian countries.
Those differences in credit periods between Mediterranean countries and European
Northern countries can be explained by following Marotta (2005) in two ways. First,
the trade credit cost depends on discounts for quick payment and penalties for delays.
While the proportion of suppliers offering discounts in a Southern country such as Italy
is really low (Marotta, 2005), Germany, a Northern country, usually grants a 2% discount
for payment within 15 days (Harhoff and Korting, 1998). In addition, the majority of
companies do not apply penalties for late payment (Wilner, 2000 for the USA, Pike and
Cheng, 2001 for the UK, Marotta, 2005, for Italy). Second, trade credit use compared
with its substitute, short term bank debt, depend on the efficiency of a countrys legal
system in enforcing contracts, to the extent that this benefits financial intermediaries.
More specifically, as pointed out by Burkart and Ellingsen (2004) trade credit should
be more important than bank credit when creditor protection is weaker, because cash is
easily diverted while inputs are more difficult to divert, and inputs illiquidity facilitates
trade credit. This may explain the finding of Demirguc-Kunt and Maksimovic (2002)
that trade credit is relatively more prevalent in countries with weaker legal protection.
This is the case of French Civil Law countries, like, in Europe, Belgium, France, Greece,
Italy, the Netherlands, Portugal and Spain (La Porta et al., 1998).
In this context, Spain has a banking oriented financial system with an important role
played by banks. There has been no real disintermediation process, as has happened in
other European countries, because the development of capital markets, and in particular
institutional funds, has been led by banks (Gallego et al., 2002). This, together with the
fact that in Spain the average size of an SME is smaller than in the wealthier northern
European countries (Mulhern, 1995), suggests that Spanish SMEs have fewer alternative
sources of external finance available, which makes them more dependent on short-term
1

European Payment Index is a report based on a written survey carried out by Intrum Justia
in 25 European countries on an annual basis involving several thousand companies.


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finance in general, and on trade credit in particular. As Demirguc-Kunt and Maksimovic

(2002) suggest, firms operating in countries with more developed banking systems grant
more trade credit to their customers, and at the same time receive more finance from
their own suppliers. In fact, Spanish firms have one of the longest effective credit periods
in Europe (Marotta, 2001).
The importance of banks in the Spanish financial system, together with the high
proportion of SMEs in the Spanish economy, makes trade credit especially important
for Spanish firms, and provides an excellent context to study trade credit dynamic
models. Specifically, the high levels of investment in accounts receivable in Spanish
SMEs make it particularly important for them to establish target levels for accounts
receivable, and hence avoid the negative effects on profitability and liquidity because of
lost or uncollectible sales. Moreover, our results may be interesting for other Southern
European countries because of the similarities with the Spanish market with regard to
the legal environment, relevance of the SME sector and the high levels of trade credit
granted by firms.
In addition, from a methodological perspective, the current work improves on previous
work by using dynamic panel data. This offers various advantages. On the one hand, it
allows us to control for the existence of unobservable heterogeneity, as there is more than
one cross-section. On the other hand, we can examine a partial adjustment model that
allows us to confirm whether SMEs possess an optimal trade credit level. Finally, the
estimation carried out using the General Method of Moment (GMM) allows us to control
for possible endogeneity problems that may arise, since the random disturbances that
affect decisions about trade credit levels may also affect other characteristics of firms.
The results obtained show that SMEs do have a target level of trade credit to which
they attempt to converge, and this adjustment is relatively quick. Moreover, we find that
firms grant more trade credit to their customers when they have lower sales growth,
are smaller, have greater access to short-term finance, generate more internal funds and
when economic growth is higher.
The rest of this work is organised as follows: in Section 2 we review the different
theories explaining the extent of trade credit. In Section 3 we describe the sample used,
while in the fourth section we outline the methodology employed. In Section 5, we
report the results of the research. We end with our main conclusions.

2. Variables Description and Hypotheses Development

If market imperfections did not exist, firms financial decisions would not affect
their value (Stiglitz, 1974). In this situation, as Lewellen et al. (1980) demonstrated,
trade credit cannot be used to increase the value of a firm. Then, all credit terms are the
present value equivalent of cash terms for both sellers and buyers. However, the presence
of market imperfections implies that trade credit decisions may affect the value of
the firm. In this sense, Emery (1984) established that there is an optimal amount
of accounts receivable when the marginal revenue of trade credit lending is equal to
the marginal cost, and this condition produces an optimal credit period. Consequently,
trade credit is a significant area of financial management, and its administration may
have important effects on a firms profitability and liquidity (Shin and Soenen, 1998),
and consequently its value.
On the one hand, in relation to the benefits, granting trade credit enhances the firms
sales, and consequently may result in higher profitability. Specifically, trade credit

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Pedro J. Garca-Teruel and Pedro Martnez-Solano

can act as an effective price cut (Brennan et al., 1988; Petersen and Rajan, 1997),
incentivises customers to acquire merchandise at times of low demand (Emery, 1987),
allows customers to check that the merchandise they receive is as agreed (quantity and
quality), ensures that the services contracted are carried out (Smith, 1987), and helps
firms to strengthen long-term relationships with their customers (Ng et al., 1999; Wilner,
2000).
On the other hand, however, these benefits have to offset the reduction of profitability
due to the increase of investment in current assets. Consequently, it is expected that firms
will pursue a target trade credit level that balances benefits and costs and maximises
the value of the firm.
On the basis of these benefits and costs, we now describe the main characteristics
of firms that are relevant when determining trade credit levels according to numerous
theories that have been offered to explain why suppliers grant trade credit to their clients.
The dependent variable used in this study is REC, which, following Petersen and Rajan
(1997), is calculated as the ratio of accounts receivable to sales. The level of accounts
receivable can change in two ways; firms either grant larger amounts of trade credit
or grant longer terms of payment. As in our dependent variable we divide accounts
receivable by sales; a higher value of REC indicates that firms grant longer terms of
payment to their customers.
2.1. Sales growth
Firms may use their trade credit policy in order to stimulate their sales. Firms whose
sales have developed inadequately and who wish to grow could use trade credit as a
mechanism to improve their sales by extending more credit to their customers. Thus, we
would expect a negative relationship between trade credit and sales growth. In this way
Emery (1987) suggests that when a firms sales are cyclical or are subject to fluctuations
they can use trade credit to incentivise their customers to acquire merchandise in periods
of low demand. By relaxing the credit terms, sellers can reduce the storage costs of the
excess inventories that would accumulate if they kept production constant. This also
allows firms to avoid the costs of changing their production levels. This is supported by
Long et al. (1993), who found that firms with variable demand granted a longer trade
credit period than firms with stable demand. In another way, Molina and Preve (2006)
show that firms facing profitability problems tend to increase trade credit receivable
prior to entering financial distress.
We measure sales growth (GROWTH) as yearly sales growth. With this variable we
try to capture the effect of possible shocks in production and sales on the accounts
receivable. Considering that trade credit can be used to stimulate sales, firms could
use more trade credit when their sales growth was low. So we would expect a negative
relationship between this variable and REC.
2.2. Creditworthiness and access to capital markets
The financial literature establishes that sellers of products have advantages over financial
institutions when it comes to information acquisition and monitoring of debtors, and
this permits certain non-financial firms with high creditworthiness to obtain funds to
help other firms which have difficulties accessing capital markets due to their low credit
rating (Schwartz, 1974; Emery, 1984; Smith, 1987; Mian and Smith, 1992; Petersen and

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Rajan, 1997). Specifically, suppliers may have a greater ability to obtain information,
because of their continuous contact with customers. The volume and frequency of
orders can provide suppliers with information about their customers current financial
situation. Moreover, they have greater control of their customers, as they can cut off
the supply of the regularly purchased merchandise. This is particularly important when
there are few suppliers in the market, and customers depend significantly on their
supplier. Sellers also have advantages in the liquidation of the products sold in the
case of non-payment. The merchandise is more valuable collateral for suppliers than
it is for financial institutions. In the case of non-payment, it can be recovered and
sold to another customer. Additionally, trade credit mitigates moral hazard problems
because inputs provided by suppliers are less easily diverted than cash provided by
banks (Burkart and Ellingsen, 2004), especially for differentiated products and services
which are more difficult to sell to another user (Burkart et al., 2005). Finally, suppliers
may be interested in the survival of their customers due to shared rents from long
standing businesses relationships (Boissay and Gropp, 2007; Cunat, 2007; Wilner,
2000).
Thus, the level of trade credit granted will depend on the creditworthiness of the
supplier and their access to external capital. Firm size and firm age are used in the
literature as proxies for the creditworthiness of the firm (Petersen and Rajan, 1997).
Larger firms are considered to have better creditworthiness and easier access to funds
in the capital markets, and older firms have had more time to develop relationships and
can be considered to have greater financial capacity and reputation in the market. From
this perspective we expect a positive relationship between trade credit and firm age and
size. However, from the perspective of the information asymmetry between buyer and
seller, different studies (Long et al. 1993; Lee and Stowe, 1993; Pike et al. 2005) found
that smaller and younger firms that have worse reputations need to use more trade credit
in order to guarantee their products. Moreover, customers may exert their market power
to buy on credit when the supplier is small in order to reduce uncertainty about the
quality of the product purchased (Van Horen, 2007). From this perspective, we can also
expect a negative relationship for these measures.
Firm size (SIZE) is measured as the logarithm of sales, and firm age (LAGE) is defined
as the logarithm of (1+age), where age is the number of years since the foundation of
the firm. Following Petersen and Rajan (1997), we also use the variable LAGE squared,
considering that the early years of the firms life are proportionately more important
in developing the reputation of the firm than later years. As we have indicated above,
the expected relationship of both SIZE and AGE with the dependent variable could be
either positive or negative.
The ability of a seller to grant credit to their customer also depends on the availability
of financial resources from banks, and also its cost. This is especially important
for small Spanish firms, which operate in an environment which is creditor-oriented
and dominated by the banks, and with a less developed capital market. We used
two variables. On the one hand we use STLEV as a proxy of short-term finance,
calculated as the ratio of current liabilities to sales. On the other hand, we include
the variable FCOST to analyse whether the cost of external finance affects the credit
granted. It is calculated as the ratio of finance costs over outside financing less trade
creditors.
We would expect that firms with a higher proportion of short-term debt and firms
with low costs for their debt would provide higher levels of trade credit.

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2.3. Internal financing

The possibility of obtaining funds for financing customers is also related to internal
financing. Petersen and Rajan (1997) point out that firms with a greater capacity to
generate internal funds, have more resources available and can offer more finance to
their customers. However, their results for USA SMEs do not support this analysis.
In contrast, more recently Niskanen and Niskanen (2006) found a positive relationship
between trade credit and internal financing for Finnish SMEs, operating in a bank-based
system similar to that encountered by Spanish SMEs.
Capacity to generate internal resources by firms is measured by the variable CFLOW,
defined as the ratio of net profits plus depreciation to sales. We expect a positive
relationship to the dependent variable, because firms with a greater capacity to generate
internal funds will have more resources available and will be able to offer more finance
to their customers.
2.4. Product quality
Smith (1987) points out that suppliers can transmit information about the quality of
their products by agreeing credit terms that allow their customers a period of evaluation.
Specifically, trade credit allows customers to verify that the merchandise received
complies with the agreed terms (quantity, quality, etc.), and ensure that any services
are carried out as agreed. If the products do not meet expectations the customers can
refuse to pay and return the merchandise. When credit is not offered, or customers pay
promptly, the merchandise can still be returned and a refund demanded, but this process
is more difficult and costly.
Likewise, longer payment deadlines can be conceded when the quality of the product
is difficult to evaluate or requires substantial time to analyse. Similarly, Lee and Stowe
(1993) regard trade credit as the best way of guaranteeing products. Smaller and younger
firms will make more use of this type of implicit guarantee, since their customers may
doubt their capacity to comply with the commitments they make, given that after the
sale they could file for bankruptcy and not honour their commitments. Long et al.
(1993) found that smaller, younger firms grant more trade credit than firms with a more
consolidated reputation in the market. These smaller, younger firms use trade credit to
signal the quality of their products. More recently, Pike et al. (2005) found that in the
USA, UK and Australia trade credit can be used to reduce information asymmetries
between buyers and sellers.
Product quality has been measured by the proxy variable TURN, calculated as the
ratio of sales over assets minus accounts receivable. According to Long et al. (1993) and
Deloof and Jegers (1996), the relationship between TURN and REC will be negative.
They establish that, all other things being equal (the same item produced for the same
use), it is reasonable to assume that it takes longer to produce high-quality goods than
low-quality goods, since, at the very least, quality-control testing must be performed.
The additional production time is necessary to perform quality-control tests and build
in low-maintenance requirements. Consequently, firms with high product quality will
offer more trade credit to their customers so that they can evaluate this quality.
2.5. Profit margin
Trade credit can be used as a form of price discrimination by firms according to whether
delays in payment are allowed or not (Brennan et al., 1988; Mian and Smith, 1992).

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Prolonging the period of credit or raising the discount for prompt payment effectively
equates to a price reduction. In this way, the same product can be sold at different prices
to different customers. Petersen and Rajan (1994) extend this argument, stating that
once firms from a particular industry decide to grant trade credit to their customers, the
terms offered follow the industry pattern, regardless of the debtors creditworthiness.
In this situation, trade credit effectively reduces the price paid by the poorest quality
customers, who are in turn the most sensitive to the price of the product. Petersen
and Rajan (1997) find support for price discrimination theory showing that firms with
higher profit margins have more interest in raising their sales. This is due to the fact
that the marginal earnings they obtain are high, allowing them to incur additional costs
to generate new sales. The profits of this kind of firm come both from their commercial
and their financial activities, and thus they can more readily accept lower returns on
the finance they grant. We would therefore expect firms with higher profit margins to
increase their trade credit levels.
Profit margin (GPROF) has been approximated by the ratio of gross profit to sales.
Following Petersen and Rajan (1997) we also include the square of this variable.

2.6. Macroeconomics factors

Levels of accounts receivable may be determined by the state of the economy (Smith,
1987). Deteriorating macroeconomic conditions may affect the use of account receivable.
On the one hand, under deteriorating macroeconomic conditions firms suffer from a
reduced ability to generate cash from their operations, and banks may reduce credit to
firms. As a result the number of days of accounts receivable may increase. On the other
hand, we also think if firms have more difficulty securing finance, they could offer
less credit to their customer. So, we control for macroeconomic effects by using the
growth in Gross Domestic Product (GDP), although it is not clear what the expected
relationship is between the business cycle and the trade credit granted by firms.
In Table 1, we summarise the explanatory determinants of trade credits and their
expected relationships.

Table 1
Determinants of accounts receivable.
Factor

Relation with
trade credit

Growth sales
Creditworthiness

Negative
Positive
Negative
Positive
Positive
Positive
Positive

- Trade credit to stimulate sales

- More capacity to grand funds
- Less need to use trade credit for guarantee products
- More capacity to grand funds
- Trade credit to signal the products quality
- More interest in raising the sales
- Use trade credit as alternative funds

Negative

- More difficulties to offer credit to costumer

Internal financing
Product quality
Profit margin
Macroeconomic
factors


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Pedro J. Garca-Teruel and Pedro Martnez-Solano

3. Sample

The data for this study have been obtained from two sources. First, data from balance
sheets, and profit and loss accounts have been collected from the Amadeus database,
developed by Bureau van Dijk. Second, Gross Domestic Product data were obtained
from Eurostat.
The sample comprises small and medium-sized firms from Spain for the period 1997
2001. The selection of SMEs was carried out according to the European Commission
recommendation 96/280/CE of 3 April 1996 on the definition of small and mediumsized firms. In particular, we selected those firms that for at last three years met the
following conditions: a) had less than 250 employees; b) turnover less than 40 million;
and c) possessed less than 27 million worth of total assets.
In addition to those selection criteria, a series of filters was applied. Thus, we
eliminated the observations of firms with errors in their financial statement, or which
exhibited signs that were contrary to reasonable expectations. For example, when the
value of total assets did not coincide with the value of total liabilities, when firms
reported a negative value for capital, fixed assets, current assets, current liabilities,
when depreciation or interest paid is negative, etc. Finally, we eliminated 1% of the
extreme values presented by some variables. 2 As a result, we ended up with a panel
consisting of 2,922 firms.
Table 2
Accounts receivable by year and sector
Accounts receivable is calculated as the ratio of accounts receivable to sales.

1997
Agriculture
Mining
Manufacturing
Construction
Retail trade
Wholesale trade
Transport and public services
Services
Total

0.1429
0.3706
0.2953
0.4107
0.1081
0.2691
0.2522
0.2
0.2658

1998
0.1437
0.3415
0.2856
0.4112
0.1058
0.2644
0.2454
0.2069
0.2595

1999

2000

2001

19972001

0.1707
0.3236
0.2926
0.3908
0.1019
0.2702
0.258
0.1994
0.2634

0.155
0.3305
0.2942
0.4063
0.1077
0.2689
0.2584
0.2171
0.266

0.12123
0.3122
0.2886
0.4016
0.1044
0.2687
0.2556
0.2225
0.2623

0.1469
0.3357
0.2913
0.4041
0.1056
0.2683
0.2539
0.2092

Table 2 reports the mean values of trade credit granted by sector and year. We observe
that the level of accounts receivable differs among sectors. So, the smallest percentage
of accounts receivable over sales is found in the retail trade (10.56%) and in agriculture (14.69%). In contrast with this, in mining (33.57%) and construction (40.41%)
more financing is granted to customers. In general, the levels of accounts receivable do
not register significant changes over the period under consideration.
Table 3 summarises the descriptive statistics of our sample. In general, if we observe
the mean values, the level of accounts receivable of the firms studied take an important
value representing 26.34% of their sales. These firms sell products and services worth
more than 11 million, and have an average age of 23 years. Annual sales growth has
2

For all variables defined in the following section, except for GDP.


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Table 3
Summary statistics
REC represents the trade credit granted; GROWTH sales growth; SALES the sales in thousands of
euros; AGE the age of the company; STLEV the short-term financing; FCOST the cost of outside
financing; CFLOW the cash flows generated by the firm; TURN the assets turnover; GPROF the gross
profit margin and GPD the Gross Domestic Product growth.

REC
GROWTH
SALES
AGE
STLEV
FCOST
CFLOW
TURN
GPROF
GDP

Mean

Std. Dev.

0.2634
0.1058
11819
23
0.3463
0.0579
0.0640
3.2734
0.0541
0.0390

0.1388
0.1986
6711
14
0.1561
0.0370
0.0584
2.9649
0.0544
0.0056

Perc. 10

Median

Perc. 90

0.0708
0.0780
5174
9
0.1651
0.0197
0.0126
1.2547
0.0066
0.0280

0.2656
0.0830
9968
20
0.3262
0.0510
0.0496
2.5952
0.0441
0.0420

0.4304
0.3016
24523
40
0.5467
0.1022
0.1365
5.5986
0.1213
0.0430

been 10%. In addition, they generate a cash flow of 6.4% over sales, finance more that
34% of sales with current liabilities, and have a gross profit over sales close to 5.5%.
Over the period 1997 to 2001 the annual Gross Domestic Product growth of Spain was,
on average, 3.9%.
4. Empirical Model

Following the previous literature reviewed in Section 2, we analyse the determinants of

trade credit granted, using a dynamic panel data model.
The static models previously used implicitly assume that firms can instantaneously
adjust toward their accounts receivable target level. In contrast, in this paper we assume
that an adjustment process may take place. We allow for any possible delays in adjusting
the target accounts receivable that may be justified by the existence of adjustment costs.
For this proposal, we assume the accounts receivable target level is explained by the
following model:

k xkit + it
(1)
REC it = +
k=1

Where x is a vector of k explanatory variables, it a random disturbance and k are

unknown parameters to be estimated.
To get to their target level, firms will adjust their account receivable levels according
to the following expression:


(2)
REC it REC it1 = REC it REC it1
where (RECit REC it 1 ) indicates the adjustment required to reach the target level. A
firms capacity to achieve the desired level will be given by the coefficient , which
takes values between 0 and 1. If is 1, the firms will adjust toward the target level
immediately; if it is 0, this indicates that the costs of adjustment are so high that the
firms cannot modify their existing levels of accounts receivable.

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Pedro J. Garca-Teruel and Pedro Martnez-Solano

Substituting (1) into (2) we obtain:

REC it = + (1 )REC it1 +

k xkit + it

(3)

k=1

which can be rewritten as:

REC it = + o REC it1 +

k xkit + it

(4)

k=1

where = ; 0 = (1- ); k = k ; and it = it

In addition, if we introduce specifically the explanatory variables, the firms unobservable individual effects and the time dummy variables, the model to estimate is:
REC it = + 0 REC it1 + 1 GROWTH it + 2 SIZEit + 3 LAGEit
+ 4 LAGE2it + 5 STLEV it + 6 FCOST it + 7 CFLOW it + 8 TURN it
+ 9 GPROF it + 10 GPROF 2it + 11 GDPt + i + t + it

(5)

where REC it represents the trade credit granted by firm i at time t to its customers;
GROWTH it sales growth; SIZE it the size; LAGE it the years of the company; STLEV it
the short-term financing; FCOST it the cost of outside financing; CFLOW it the cash
flows generated by the firm; TURN it the assets turnover; GPROF it the gross profit
margin and GDP t the Growth Domestic Product growth. In addition, i controls for the
unobservable characteristics of each firm (the executives management capacity, their
personal skills, time-invariant industry effects that are specific to the industry in which
the firm operates such as entry barriers, etc.), which are constant in the period. t are
time dummy variables that change over time, but are equal for all the firms in each of
the years considered. it are the random disturbances. We should bear in mind that the
parameter 0 is 1 minus the adjustment coefficient (the adjustment costs).
Regressions of dynamic panels are characterised by the existence of autocorrelation,
as a consequence of considering the lagged dependent variable as an explanatory
variable. In this way, estimations used in static frameworks lose their consistency. 3
Indeed, the estimation by OLS of Equation (5) is inconsistent even if the it are not
serially correlated, since RECit1 is correlated with i . The intragroup estimator, which
estimates the variables transformed into deviations from the mean, is also inconsistent
as a consequence of the correlation that arises between (REC it 1 - REC it1 ) and (it -it ).
Finally, the OLS estimation of first differences is equally inconsistent, since REC it 1
and  it are correlated, given that REC it 1 and it 1 are.
Considering these limitations, the parameters of Equation (5) should be estimated
using instrumental variable estimators and specifically applying the General Method
of Moment (GMM) to the equation in first differences. This procedure, developed by
Arellano and Bond (1991), 4 presents two levels of application dependent upon the nature
of the it . If the residuals are homoskedastic, the 1-stage GMM turns out to be optimal.
If, however, there is heteroskedasticity, the estimator of instrumental variables in one
stage continues to be consistent, but conducting the estimation in two stages increases
efficiency. This procedure makes use of the residuals of the 1-stage estimation.
The GMM estimations that use lagged variables as instruments under the assumption
of white noise disturbances are inconsistent if the errors are autocorrelated. In this way
3

See Baltagi (2001).

Arellano and Bonds (1991) GMM estimators use more instruments and are more efficient
than the estimator proposed by Anderson and Hsiao (1982).


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A Dynamic Approach to Accounts Receivable

411

this methodology assumes that there is no second-order serial correlation in the errors in
first differences. For this reason, in order to test the consistency of the estimations, we
used the test for the absence of second-order serial correlation proposed by Arellano and
Bond (1991). We also employed the Sargan (1958) test for over-identifying restrictions,
which tests for the absence of correlation between the instruments and the error term.
5. Results

5.1. Univariate analysis

In order to have a preliminary idea of the possible effect that the determinants previously
considered have on the trade credit granted, in Table 4 we present the mean value of
variables for each quartile of the variable REC. As we have constructed the quartiles
annually, the range of variable REC overlaps across quartiles. To test if there are
difference between the fourth quartile and the first quartile, we carried out a difference
of means tests based on Students t.
In general, all the variables, with the exception of the variable TURN, present
values which are significantly different for high and low values of accounts receivable.
According to what we expected initially, we observe greater levels of trade credit granted
by smaller firms, by firms with more cash flow, with more short-term financing, with
higher gross profit margin, and when the cost of external funds is lower. However,
in contrast to our initial expectations, we found that the effects for variable AGE are
contrary to the effects for the variable SIZE, and that the level of accounts receivable is
higher in firms with higher sales growth.
The results obtained in the univariate analysis point out the need to conduct further
analysis. As we can see, the variables considered could have an effect on the level of trade
credit granted. But some of them do not change monotonically with levels of accounts
receivable, and comparing the first and fourth quartiles is not sufficient to describe the
relationship between accounts receivable and the explanatory variables considered.
5.2. Multivariate analysis
Table 5 reports alternative estimates of the empirical specification. In column 1 we
estimate, following Petersen and Rajan (1997), a static model using OLS. The results
are quite similar. Like these authors, our results show that the dependent variables relate
positively with the age of the firms and with their capacity to get short term funds, and
negatively with their capacity to generate internal funds. It also confirms, as in Petersen
and Rajan (1997), the price discrimination theory. However, this specification assumes,
as in the previous literature about accounts receivable, instantaneous adjustment toward
the target level of accounts receivable, which may be very restrictive. Therefore, in
column 2 we explore the implications of allowing dynamic adjustment, and re-estimate
the OLS regression with the inclusion of the lagged dependent variable. This result
would indicate that the dynamic specification is appropriate, since the lagged dependent
variable is significant.
Nevertheless, in the presence of firm-specific effects OLS coefficients are biased
assuming that i is unobservable and covariances between regressors and i are
non-zero (Hsiao, 1985). Additionally, in the dynamic specification, even when unobservable firm-specific characteristics are not correlated with the regressors, OLS will result

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GROWTH
SIZE
LAGE
STLEV
FCOST
CFLOW
TURN
GPROF

Range of REC

0.1047
9.3386
2.9524
0.2342
0.0599
0.0560
3.3627
0.0433

(0.0001 to 0.1748)

1er Quartile

0.0929
9.2378
3.0593
0.3153
0.0620
0.0673
3.1378
0.0535

(0.1629 to 0.2702)

2 nd Quartile

0.1050
9.1958
3.0822
0.3725
0.0586
0.0678
3.1484
0.0591

(0.2598 to 0.3470)

3rd Quartile

0.1208
9.1429
3.0591
0.4632
0.0511
0.0650
3.4447
0.0604

(0.3387 to 0.9496)

4th Quartile

3.28
15.26
8.44
69.44
9.96
6.35
1.18
13.15

REC represents the trade credit granted; GROWTH measure sales growth; SIZE is the log of sales, LAGE the log (1+ the age of the company); STLEV the
short-term financing; FCOST the cost of outside financing; CFLOW the cash flows generated by the firm; TURN the assets turnover and GPROF the gross profit
margin. t statistic for a difference of means tests between the fourth quartile and the first one in last column.

Table 4
Mean values of the determinants of accounts receivable by REC quartiles

412
Pedro J. Garca-Teruel and Pedro Martnez-Solano

A Dynamic Approach to Accounts Receivable

413

Table 5
Determinants of accounts receivable (I)
Dependent variable is REC calculated as accounts receivable to sales. GROWTH measure sales growth;
SIZE is the log of sales; LAGE the log (1+ the age of the company); STLEV the short-term financing;
FCOST the cost of outside financing; CFLOW the cash flows generated by the firm; TURN the
assets turnover; GPROF is the gross profit margin and GPD the Gross Domestic Product growth. t
statistic in brackets. m 2 is a test for second-order serial autocorrelation in residuals in first differences,
distributed asymptotically as N(0,1) under the null hypothesis of no serial correlation. The Sargan Test
is a test of over-identifying restrictions distributed asymptotically under the null hypothesis of validity
of instruments as Chi-squared. Degrees of freedom in brackets. , and indicate coefficient is
significant at the 1%, 5% and 10% level, respectively.

1
(OLS)
REC t1
GROWTH
SIZE
LAGE
LAGE2
STLEV
FCOST
CFLOW
TURN
GPROF
GPROF2
GDP
Constant
m2
Sargan
Observations

0.0105
(2.29)
0.0210
(12.23)
0.0314
(2.51)
0.0001
(0.06)
0.5500
(93.47)
0.3855
(15.76)
0.1576
(6.98)
0.0094
(28.66)
0.7152
(24.72)
0.9164
(7.14)
0.2873
(1.8)
0.1532
(5.72)

14610

2
(OLS)
0.7831
(167.32)
0.0588
(18.72)
0.0021
(2.0)
0.0155
(1.85)
0.0015
(1.13)
0.1708
(40.34)
0.1967
(12.53)
0.0283
(2.03)
0.0032
(15.86)
0.1772
(9.77)
0.1437
(1.87)
0.2425
(2.79)
0.0261
(1.48)

11688

3
(GMM-EX)
0.1766
(4.29)
0.0187
(3.5)
0.0502
(7.09)
0.1824
(2.01)
0.0675
(2.65)
0.4155
(20.86)
0.2237
(6.95)
0.1655
(4.12)
0.0090
(5.41)
0.0325
(0.83)
0.1092
(0.6)
0.2294
(2.45)
0.0045
(1.52)
1.19
16.19(5)
8766

in inconsistent estimation of the coefficient parameters since REC it 1 will be correlated

with i which is constant. One way of dealing with this problem is to take differences
in order to eliminate the firm-specific effects, although again, OLS regressions do not
consistently estimate the parameters.
That problem advocates the use of an instrumental variable estimation method, where
the dependent variable is instrumented. Hence, we have estimated equation (5) using

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Pedro J. Garca-Teruel and Pedro Martnez-Solano

GMM, where the fixed effects haven been eliminated by first differencing and all the
variables except the lagged dependent variable are treated as exogenous. In column 3 we
present the results obtained. However another estimation problem, that is not necessarily
specific to the dynamic specification, arise because the firms specific variables are
unlikely to be strictly exogenous. In this way, the null hypothesis of valid instruments is
rejected at 1% level of significance. We accordingly conclude that it is inappropriate to
treat the regressors as strictly exogenous. Shocks affecting accounts receivable levels of
firms are also likely to affect other explanatory variables. Furthermore, it is likely that
the regressors may be correlated with the past and the current values of the idiosyncratic
component of disturbances.
Consequently in Table 6 we show the results from regressing accounts receivable over
its potential determinants where all variables including the lagged dependent variable
are treated as endogenous. We do not detect any second-order serial correlation and
the Sargan test indicates that the instruments used in these GMM estimations 5 are not
correlated with the error term. In Column 1, we present the results of the estimation of
our initial model (Equation 5). The results present important differences from the results
in Table 5. These differences indicate that endogeneity is a real concern requiring proper
econometric treatment, and present the GMM estimation where the lagged dependent
variable and explanatory variables are assumed to be endogenous as the most appropriate.
From our perspective, these differences in findings serve to highlight the importance of
the present study, since we have taken into account the potential endogeneity problem,
which may have biased the estimated relationships in the previous literature.
In Column 2, to get additional information about the effects of sales growth,
we estimated the model excluding the variable GROWTH, and including variables
PGROWTH and NGROWTH. The first one is built as the positive yearly variation in
sales, and the second as the negative yearly variation. Continuing this line of reasoning,
in Column 3 we replace the variable CFLOW with the variables PCFLOW and NCFLOW,
which measure the positive cash flow and negative cash flow separately. Finally, in spite
of the fact that i could capture industry-specific effects, in Columns 4 and 5 we check
whether the results would change if we controlled specifically for such effects. As all the
analysis was carried out using the panel data methodology, and the estimation transforms
the variables in first differences, the introduction of sectorial dummies, which take value
1 if the firm belongs to a specific sector and 0 otherwise, is not possible. So, in one mode
of analysis, in Column 4 we consider that assets turnover is a sectors characteristic, and
generate the variable IND as the difference between TURN and the mean value that this
variable presents in the firm sector. Using a different mode of analysis, in Column 5
we include the traditional industry dummies (0, 1) without transforming this variable in
first differences. The results obtained in the different estimations (Columns 1 to 5) are
totally consistent.
First, we find that the variable REC t 1 is significant at the 1% level in all the
estimations made. This result confirms our main aim of providing evidence that the
dynamic nature of our model is not rejected. Therefore, we contribute to the trade credit

The estimations have been carried out using the 2-stage GMM estimator, since the 1-stage
estimations can present problems of heteroskedasticity, as is shown by the rejection of the
null hypothesis of the Sargan test.


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A Dynamic Approach to Accounts Receivable

415

Table 6
Determinants of accounts receivable (II)
Dependent variable is REC calculated as accounts receivable to sales. GROWTH measure sales growth;
PGROWTH the positive sales growth; NGROWTH the negative sales growth; SIZE is the log of sales;
LAGE the log (1+ the age of the company); STLEV the short-term financing; FCOST the cost of
outside financing; CFLOW the cash flows generated by the firm; PCFLOW the positive cash flows;
NCFLOW the negative cash flows; TURN the assets turnover; IND control for sectorial effects; GPROF
is the gross profit margin and GPD the Gross Domestic Product growth. All estimations have been
carried out using the 2-stage GMM estimator. z statistic in brackets. m 2 is a test for second-order serial
autocorrelation in residuals in first differences, distributed asymptotically as N(0,1) under the null
hypothesis of no serial correlation. The Sargan Test is a test of over-identifying restrictions distributed
asymptotically under the null hypothesis of validity of instruments as Chi-squared. Degrees of freedom
in brackets. , and indicate coefficient is significant at the 1%, 5% and 10% level, respectively.

1
REC t1
GROWTH
PGROWTH
NGROWTH
SIZE
LAGE
LAGE2
STLEV
FCOST
CFLOW
PCFLOW
NCFLOW
TURN
IND
GPROF
GPROF2
GDP
Agric

0.2284
(4.22)
0.0673
(2.69)

0.0777
(2.13)
0.0812
(0.88)
0.0327
(1.17)
0.1520
(2.08)
0.0336
(0.32)
0.3390
(1.79)

0.0003
(0.08)

0.3183
(1.67)
0.1839
(0.28)
0.7556
(4.25)

0.2273
(4.13)

0.1094
(2.73)
0.0588
(0.51)
0.0591
(1.8)
0.0943
(1.03)
0.0346
(1.27)
0.1663
(2.32)
0.0047
(0.04)
0.2397
(1.24)

0.0007
(0.18)

0.2127
(1.2)
0.0308
(0.05)
0.7137
(3.98)


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0.2380
(4.37)

0.1216
(3.15)
0.1392
(1.34)
0.0587
(1.79)
0.0997
(1.08)
0.0357
(1.29)
0.1354
(1.93)
0.0222
(0.22)

0.3369
(1.87)
0.3803
(1.04)
0.0005
(0.12)

0.2803
(1.63)
0.0795
(0.12)
0.6682
(3.88)

0.2334
(4.35)

0.1204
(3.1)
0.1458
(1.4)
0.0604
(1.87)
0.1071
(1.17)
0.0381
(1.39)
0.1385
(1.99)
0.0290
(0.28)

0.3301
(1.82)
0.3641
(1.01)

0.0001
(0.02)
0.2784
(1.64)
0.0479
(0.07)
0.6574
(3.89)

0.2603
(5.03)

0.1098
(3.02)
0.1345
(1.33)
0.0637
(1.93)
0.1116
(1.23)
0.0406
(1.5)
0.1327
(1.91)
0.0437
(0.43)

0.4522
(2.55)
0.3310
(0.92)
0.0004
(0.12)

0.2952
(1.67)
0.0227
(0.03)
0.6234
(3.73)
0.0074
(0.71)

416

Pedro J. Garca-Teruel and Pedro Martnez-Solano

Table 6
Continued.

Manufac
Construc
Retail
Wholes
Transutil
Serv
Constant
m2
Sargan
Observations

0.0038
(1.07)

0.0022
(0.65)

0.0020
(0.59)

0.0018
(0.53)

0.83
58.79(45)
8766

0.59
58.80(49)
8766

0.58
60.58(53)
8766

0.54
60.63(53)
8766

5
0.0114
(1.22)
0.0126
(1.23)
0.0096
(1.01)
0.0114
(1.21)
0.0148
(1.55)
0.0160
(1.59)
0.0101
(1.01)
0.74
63.80(53)
8766

literature finding that firms have a target level of accounts receivable and follow an
adjustment process to reach this target. The adjustment coefficient (1- 0 ) is high in
all the estimations (ranging between 0.73 and 0.77) indicating that this adjustment is
relatively quick. This speed of adjustment could be partially affected by the long delay
payment periods presented by the SMEs Spanish firms.
The evolution of sales has an effect on the decision about trade credit, as indicated
by the negative and significant coefficient at the 1% level of the variable GROWTH
(Column 1). Firms with less growth in sales grant more financing to their customers.
This could be interpreted as meaning that firms use trade credit in an attempt to stimulate
sales. To explore this further, we study whether there is a different effect when sales
growth is positive or negative. To do that, in Column 2, we substitute the variable
GROWTH by PGROWTH and NGROWTH to consider separately the effects of positive
and negative sales growth. The former takes positive values of sales growth, and 0
otherwise, and the latter takes negative values, and 0 otherwise. In all the estimations,
only the variable PGROWTH is significant (at the 1% level). Hence, firms use trade
credit to stimulate sales only when they have positive growth. In addition, the economic
impact 6 of this variable is relevant, since if PGROWTH decreases by one standard
deviation the dependent variable increases, depending on the regression used, by between
9.45% and 10.65%. Nevertheless, when sales growth is negative there is no significant
6

The economic impact of statistically significant explanatory variables is measured as the

percentage of change (over the mean value) in the dependent variable due to a one standard
deviation change in the explanatory variable, all other things being equal. In addition, recall
that in this partial adjustment model, the estimated coefficient ( k ) is equal to k . So, the
interpretation of how that characteristic impacts target cash levels ( k ) should be divided by
.


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effect on trade credit, perhaps because in a recession firms have more difficulty in
securing funds, and as a consequence, in granting financing.
The coefficient of SIZE is significant and negative, which demonstrates that the larger
firms grant less financing to their customers. This supports the argument of Long et
al. (1993) who considered that smaller firms have less reputation and need to use more
trade credit to guarantee their product. Specifically, an increase in one standard deviation
in the variable SIZE involves a reduction in the variable REC (over the mean) of around
17.39% (from 15.88% in Column 2 to 20.90% in Column 1). However, the coefficients
of variables AGE and its square are not significant, which shows that the age of the firm
has no effect on the level of accounts receivable.
We also observe that the coefficient of variable STLEV is positive and significant
in all regressions (in three of them at the 5% level, and in two at the 10% level). This
result can be interpreted as meaning that firms offer longer terms of payment when
they can get more short-term funds. The higher the level of short-term financing, the
higher the level of trade credit granted. In addition, this result could show that firms
match the maturity of their assets and liabilities. With regard to the economic effect on
the dependent variable, an increase of one standard deviation in the variable STLEV
produces an increase in REC, on average, of around 11.26%. However, we detect no
significant effects of FCOST on accounts receivable. The cost of external funds appears
not to be a relevant factor considered by firms when taking decisions about offering
trade credit.
As we expected, we find that firms finance a higher proportion of their sales when they
are capable of generating more internal funds. We also considered whether the positive
relationship between CFLOW and REC remained if we considered the effects of positive
cash flow and negative cash flow separately. As before, we removed the variable CFLOW
and replaced it with the variables PCFLOW and NCFLOW. PCFLOW is calculated as
the ratio of the resources generated internally (net profits plus depreciation) to sales,
when these resources are positive, and NCFLOW is the ratio of the negative internal
resources to sales. In this way, the results show that firms only grant more trade credit
when they have positive cash flows, since only the variable PCLFOW is significant.
The economic effect on the dependent variable is quite similar to the variable STDEBT.
Specifically the economic impact of this variable is around 10.60%. It follows from the
preceding results that, taking the variables CFLOW and STLEV, we can confirm that
the capacity of firms to get funds affects the decision of the firms about granting trade
credit.
Similarly, none of the coefficients estimated for the variable TURN are significant.
Consequently, we cannot provide any empirical support for the argument advanced by
Long et al. (1993), that firms with lower sales turnover, which could be considered to
produce a higher quality product, offer more trade credit to their customers so that they
can test product quality.
As far as the variable GPROF is concerned, the estimated coefficients are significant
only in two of the five estimations, and that only at the 10% level. For its square, the
coefficients are not significant in any of the estimations. With these results, we do not
have enough evidence to accept that the dependent variable is determined by GPROF. As
a consequence, the price discrimination theory is not supported. We do not find, as we
initially expected, that firms with larger operating margins, in order to generate further
cash flow, use trade credit to finance the sales of additional units to poorer costumers.
Finally, with regard to the effect of economic growth on the level of trade credit
granted, the estimated coefficients for the variable GDP are positive and significant at

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Pedro J. Garca-Teruel and Pedro Martnez-Solano

the 1% level in all the estimations carried out. This shows that when economic growth
is higher, firms finance more sales to their costumers. This is consistent with the results
obtained for STLEV and CFLOW which indicated that firms granted more credit when
they had more capacity to get financing. However, the economic impact of this variable
is limited. The greatest impact is observed in Column 1, and barely exceeds 2%.

6. Conclusions

Trade credit has an effect on levels of invested assets and consequently may have an
important impact on the profitability and liquidity of a firm. Granting trade credit
improves sales for the firm, but it also has costs due to the increase of investment
in current assets. Emery (1984) established that there is an optimal level of accounts
receivable when the marginal revenue of trade credit lending is equal to the marginal cost,
and this condition produces an optimal credit period. Following this line of argument,
in this paper we have investigated the determinants of accounts receivable assuming
that firms have an optimal trade credit policy and they cannot immediately adjust to
this target level of accounts receivable. Thus, in contrast to previous evidence, our
main contribution was to test whether the accounts receivable decisions follow a partial
adjustment model. Moreover, using a dynamic panel data model and employing GMM
methods of estimation, we controlled for unobservable heterogeneity and for potential
endogeneity problems.
The results show that, in effect, the decisions about granting trade credit follow a
partial adjustment model. This aspect, not considered previously in the literature, reveals
that firms have a target level of accounts receivable and take decisions in order to reach
that level. The estimated adjustment coefficient, which ranges between 0.73 and 0.77
according to the different estimations, reveals that that adjustment is relatively quick.
We also find that decisions about granting trade credit are explained by several factors,
including the growth in sales (if positive), the size of the firms, their capacity to get
short-term financing and to generate internal funds, and by economic growth. In this way,
we find that firms granted more credit to their customers when their sales growth was
smaller, which could indicate that firms use trade credit to stimulate their sales. This
result only remains when positive sales growth is considered. Moreover, the smaller
firms, which usually have less reputation, use more trade credit to guarantee their
product. In addition, the capacity of firms to get funds also determined the level of
trade credit granted. In this way, firms use more trade credit when they have more
currents liabilities and when they generate more cash flow. We also found a positive
relationship between accounts receivable and economic growth, but the economic impact
of this variable is limited.
Nevertheless, contrary to what we previously expected, factors such as the age of the
firm, the cost of external financing, the rate of turnover of assets, and the gross profit
margin, which initially could be considered as determinants of the level of trade credit
granted, do not affect the levels of accounts receivable.
To conclude, our results are different in some important respects from the findings
of previous papers, and this underlines the importance of the present study. This
result suggests that the heterogeneity of firms and endogeneity problems are crucial
in analysing trade credit decisions.
This paper shows the importance of trade credit management for firms with high levels
of investment in accounts receivable, and especially for firms facing long delay payment

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A Dynamic Approach to Accounts Receivable

419

periods, such as in Southern European countries, due to the cost of over-investing in

accounts receivable. As long as there is an optimal level of accounts receivable, firms
may establish target levels in order to monitor accounts receivable investment, and so
avoid negative effects on value because of lost sales or uncollectible sales.
While our research makes a valuable contribution to the literature of trade credit,
to understand trade credit completely is very important, not only to study trade credit
as part of the firms assets (accounts receivable) but also as a resource for financing
(accounts payable). To study the determinants of trade credit received (accounts payable),
considering its possible dynamic behaviour is an important step for future research.

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